Adapt or Perish: Evidence of CEO Adaptability to Industry Shocks
47 Pages Posted: 20 Mar 2013 Last revised: 6 May 2018
Date Written: April 3, 2015
Prior turnover literature documents that poor performance leads a board of directors to terminate the CEO, but does not explore the underlying causes of the CEO’s poor performance. Recognizing that terminated CEOs have often been successful earlier in their tenure, we conjecture that changes in a firm’s business environment can cause the board to decide that the existing CEO’s skills do not fit with the firm’s current leadership needs. Our results suggest that CEOs struggle to adapt to industry shocks related to investments, growth opportunities, and product markets, and that the well-documented relation between firm performance and CEO turnover depends on these industry shocks. We also find that the relation between industry shocks and CEO turnover depends on various features of corporate governance and whether the CEO is identified as having “generalist” skills. Finally, we document that adaptable CEOs command a pay premium and that turnover among other top five executives is a complex function of industry shocks and the turnover decision regarding the CEO.
Keywords: CEO adaptability, strategic industry shocks, CEO turnover, top management turnover, CEO entrenchment, agency
JEL Classification: G34, M40, M41
Suggested Citation: Suggested Citation